Views on improving the integrity of global capital markets
16 December 2013

2014 Market Outlook EMEA: Turnaround in European Sentiment, But Mis-selling Concerns Persist

According to the 2014 Global Market Sentiment Survey, optimism over the prospects for global economic growth is higher among CFA Institute members in the EMEA region (Europe, the Middle East, and Africa) than in the Americas or Asia Pacific regions, with 69% of EMEA respondents anticipating global growth next year.

Moreover, expectations for local economic growth in EMEA have risen sharply. This year, 56% of member respondents expect expansion in 2014, up from just 33% in the prior year. Within EMEA, sentiment is strongest in the United Kingdom, where fully 74% of respondents expect local economic growth in 2014 — the highest percentage among all markets analysed. This positive sentiment likely reflects the recent upswing in economic developments in the U.K., with the government and Bank of England sharply revising their GDP estimates upward. Notable exceptions to the positive sentiment among EMEA members are France and South Africa, where less than half of respondents thought that their local economy would expand.

A broad theme behind the positive sentiment in EMEA is the progress of recovery in Europe and the waning of tensions in sovereign debt markets. Among EMEA members, the easing of sovereign debt challenges is considered the main positive influence affecting global capital markets in 2014, a view expressed by 38% of respondents, a plurality. Similarly, 79% of respondents indicated that progress of recovery in Europe will have a positive impact on local markets, a figure that rises to 90% in France and Switzerland and 94% in Germany. Despite improved confidence in local market conditions, EMEA members most frequently cite the U.S. equity market as the best investment opportunity in 2014.

Turning to market integrity considerations, EMEA members continue to cite a lack of ethical culture among financial firms as the factor that most contributes to the lack of trust in the industry. This view is expressed by 61% of EMEA respondents, the highest percentage among regions.

The concern over ethical culture is well founded: a recent report on ethical conduct in financial services by the Economist Intelligence Unit, sponsored by CFA Institute, found that only 37% of financial services executives thought better ethics would lead to better financial results, and 53% said career progression would be difficult without being “flexible” on ethics. At the same time, the CFA Institute & Edelman Investor Trust Study reveals the value placed on ethics by investors: when asked what attribute they consider to be most important when making a decision to hire an investment manager, investors cited “trusted to act in my best interests” twice as often as “ability to achieve high returns.” Together, these findings clearly indicate that there are several reasons why a stronger emphasis on ethical culture is needed within financial firms.

Within local markets, for the second year in a row, members identify market fraud and mis-selling by financial advisers as the two most serious ethical issues. In EMEA, 30% of respondents, a plurality, selected mis-selling as their most serious concern, followed by market fraud (21%). These findings are not surprising as a number of European markets have experienced product mis-selling scandals in recent times, ranging from mis-sold payment protection insurance and structured products to mis-sold interest rate swaps. Indeed, just this week, U.K. authorities fined Lloyds Banking Group £28 million for inappropriate sales and remuneration practices in relation to investment products.

To improve the state of trust and market integrity at the global level, EMEA members most frequently cite improved regulation and oversight of global systemic risk, a view expressed by 38% of respondents in South Africa (the highest), 36% in Germany, and 32% in the United Kingdom. At the local level, improved enforcement of existing laws and regulations is considered the primary factor to improve trust and integrity, a view shared by just under a third of respondents again in South Africa, Germany, and the United Kingdom. An exception to this view was found in Switzerland, where the plurality of respondents, 31%, cited improved corporate governance practices as the factor most needed to restore trust and integrity in the local market.

As we turn towards 2014, investors must hope that their optimism over markets and the economy is bolstered by an improvement in ethics and trust.

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About the Author(s)
Rhodri Preece, CFA

Rhodri Preece, CFA, is Senior Head of Industry Research for CFA Institute. He is responsible for building and maintaining the global research function at CFA Institute, including leading the planning, coordination, and creation of research content across CFA Institute research platforms, which include the Future of Finance, the CFA Institute Research Foundation, the Financial Analysts Journal, and the Enterprising Investor blog. Preece formerly served as head of capital markets policy EMEA at CFA Institute, where he was responsible for leading capital markets policy activities in the Europe, Middle East, and Africa region. Preece is a former member (2014-2018) of the Group of Economic Advisers of the European Securities and Markets Authority (ESMA) Committee on Economic and Markets Analysis. Prior to joining CFA Institute, Preece was a manager at PricewaterhouseCoopers LLP where he specialized in investment funds.

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